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Mills,.  John 

On  credit  cycles  and  the  origin  of  ooiranercial 
panics,  (read  December  11th,  1867) 
p [9-J-40  tab  0 

From  the  Transactions  of  the  Manchester  statis- 
tical society  1867 

Vol.  •<  r»:T5f  fs 


Reproductions  may  not  be  made  mthout  permission  from  Columbia  University  Libraries. 









/ I 


:?o5  3 3 




MAIN  ENTRY:  Manchester  Statistical  Society.  (Manciiester^  EngJand^^ 

On  credit  cycies  and  the  origin  of. cornmerciai  panics 

Bibliographic  Irregularities  in  the  Original  Document: 

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Inserted  material: 






Br  John  Mills 

[Read  December  11th,  1867.] 


Introductory,  on  Method — Search  for  Inductions—Mr.  Langton’a 
“Waves” — Periodicity  of  Panic — No  Corresponding  Regularities  in  General 
Trade  Conditions — Nor  in  immediate  Antecedents — Regularity  discovered 
in  Changes  following  Crisis — Results  from  their  succession — Growth  of 
Credit  through  Normal  Cycles — Mental  Origin  —What  is  Credit?-  and  how 
does  Panic  affect  it? — First,  or  Post  Panic  Period — Its  Features  and 
Development — Accidental  Modifications — Middle,  or  Revival  Period — 
Influence  of  New  Firms — Increment  of  Capital — Third,  or  Speculative 
Period — Further  Change  of  Mental  Mood— Morbid  Stage  of  Credit— Results 
of  Excessive  Inflation — On  General  Prices — On  Railway  Stocks — Summary 
of  Subdivisions  in  Normal  Cycle — Conclusions  therefrom— Illustrations  by 

Composite  action  of  above  Law,  with  Law  of  Demand  and  Supply  of 
Capital — Equilibrium  of  Credit  and  Capital— Corrective  force  of  Price  of 
Loans — Illustrations  in  1852-3,  and  1H60-1 — Effect  of  proposed  “Free 
Issues”— Loss  of  corrective  force  in  morbid  stage  of  Credit— Sources  of 
supply  of  Capital  cut  off— Effect  of  “ Free  Issues”  at  this  stage— The  Three 
Suspensions  during  Panic— True  cause  of  Relief  thereby  afforded — Remedial 
tendency  of  Economic  Training — Moral  Cause,  Moral  Remedy — Appeal  to 


Date.  Monetary  Systxim  of  Period.  Channel  of  previous  Speculation,  &c.  Special  Features  of  Crisis.  | Special  Effects. 

1815-6.  Inconvertible  Pap('r  cur -'cncy,  Immense  issues  of  paper  fostered  gen- 240  Country  Banks  failed.  Great  de- Destruction  of  Country  Bank  pajier 
under  Bank  Restriction  Act  eral  speculation.  Creation  of  a struction  of  credit.  caused  paper  currency  to  rise  almost 

great  number  of  Country  Banks.  to  par.  and  prepared  the  way  for 

resumption  Act  of  1819. 

1825.  Free  Note  issues,  convertible  South  American  Mining,  and  general  Bullion  raluced  in  Dec.  to  £1,260,000.  When  foreign  exchanges  became  fa- 
on  demand,  under  Peel's  speculation.  Overissues  by  Country  70  Country  Banks  failed.  Best  Gov-  vorable,  Bank  of  England  began  to 

Act,  1819.  Banks,  in  face  of  outward  drain.  eminent  securities  inconvertible  advance  on  a large  scale,  and  so 

into  money.  restored  confidence. 

1896-9.  Ditto  ditto  ditto  Foreign  Loans.  Railway  speculations.  Double,  or  split  Crisis.  Bullion  in  Crisis  led  to  Committee  of  1840,  and 

Joint  Stock  Banks  estab-  Inflation  of  credit,  through  the  new  Nov.,  1836,  £3,840,000.  Two  bad  Bank  Act,  1844. 

lished.  J.  S.  Banks.  From  1836  to  39,  great  harvests,  1838-9,  led  to  foreign  drain. 

Corn  speculations.  Bank  neglected  to  raise  rate.  Bullion 

in  Sept.,  1839,  £2,406,000. 

1847,  Regulated  issues  and  special  Grain  and  Railway  speculations.  Bullion  in  Banking  deparement  re- Bank  Act  suspended,  but  only  £400,000 
metallic  reserve,  under  duced  by  foreign  drain  to  £2,588,  issu^,  and  this  not  required.  No 

Bank  Charter  Act  of  1844.  000,  but  no  run  for  gold.  Bank  infringement. 

notes  in  full  credit.  Consols  almost 

1857.  Ditto  ditto  ditto  Speculation  and  over  xdvances  in  Failure  of  Scotch  and  Liverpool  Banks.  Bank  Act  again  suspended.  Actual 

Gla.sgow  and  Liverpool,  Vast  Am-  Bullion  in  Banking  department,  issues  beyond  limit  £928,000. 

erican  trade  at  time  of  American  11th  Nov.,  £1,462,153. 


1866.  Ditto  ditto  ditto  Joint  Stock  Companies,  under  Limited  Failure  of  Banks,  Discount  Com- Bank  Act  suspended  for  third  time. 

Liability  Act,  1862.  Speculations  panics,  Financial  Companies,  and  No  excess  over  limit.  Rate  lO  per 

in  Cotton  in  falling  Market.  Over  Speculative  trailers.  Banking  re-  cent,  continued  for  three  months, 

advances  by  Discount  Companies  on  serve  reduced  to  £850,000,  English  credit  tainted  abroad,  for- 

Contractors’  Bills,  and  Ships,  &c.  eigners  having  mistaken  meaning 




On  Credit  Cycles  and  the  Origin  of  Commercial 


By  John  Miils. 

[Read  December  11th,  1867.] 

iJt  is  scarcely  a matter  for  surprise,  and  still  less  for  regret,  that 
every  commercial  crisis  occurring  in  this  country  is  promptly 
followed  by  a literature  of  pamphlets,  discussing  the  phenomena 
and  their  supposed  causes,  while  they  are  yet  matters  of  painful 
interest  to  the  public  mind.  In  these  disquisitions,  to  much  that 
is  serviceable  in  the  way  of  local  and  professional  evidence,  there 
is  usually  added  an  abundance  of  wholesome  homily  as  to  the 
future,  combined  in  some  cases  with  emphatic  appeals  on  behalf  of 
inventions  for  the  improvement  of  our  system  of  paper  currency. 
One  feature  these  productions  have  in  common : they  deal  with 
proximate  causes  only,  or  with  mere  a itecedents  as  causes ; each 
crisis  appearing  to  be  the  result  of  its  own  separate  accident, — 
usually  some  event  lying  on  the  surface  of  commercial  history. 
The  highest  attempt  at  generalisation  does  not  ascend 
beyond  the  fact — unquestionable  in  itself — that  over-trading,  in 
some  form  or  other,  is  the  common  forerunner  of  Panic.  Over- 
trading, however,  is  not  an  ultimate  fact,  and  its  regular  recur- 
rence claims  explanation  quite  as  importunately  as  the  tragic  events 
which  follow  it. 


Can  wo  got  beyond  this  primitive  method  of  dealing  with  u pro- 
blem so  momentous?  Does  the  nature  of  the  case  permit  the 
application  to  it  of  the  method  by  which  modem  science  biings 
physical  and  even  social  phenomena  within  the  region  of  causation 
and  law  ? Do  any,  and  what  uniformities  of  sequence  emerge  from 
the  mass  of  circumstances,  firm  and  continuous  enough  to  be  made 
the  basis  of  generalisations  by  which  we  may  ascend  to  a point 
commanding  the  relation  of  all  these  events  one  to  another? 

A first  glance  into  the  matter  does  not  inspire  much  hope  of 
success  ill  sujh  an  enterprise.  Against  a back  ground  of  infinitely 
diverse  particulars — of  elements  in  perpetual  flux,  and  blown  about 
bjr  ever  varying  currents  of  tendency,  there  appear,  it  is  true,  some 
events  occurring  in  serial  order;  but  on  examination,  the  most 
exact  and  obvious  of  these  serve  only  to  explain  themselves,  gi’vdng  ' 
no  furtherance  whatever  to  an  enquiry  into  the  wider  and  more 
disastrous  fluctuations  in  question.  I do  not  remember  to  have 
anywhere  seen  the  results  of  observation  in  this  direction  more 
clearly  described  than  in  a paper  read  before  this  Society  by  its 
present  president,  Mr.  Langton,  in  December  1857^  illustrated  by  a 
diagram, (showing  the  fluctuation?  of  the  currency  over  a consider- 
able period^  on  a plan  which  was  afterwards  expanded  in  the 
larger  charts  published  by  Professor  Jevons ; and  I have  a natural 
pleasure  in  reading  to  you|^e  following  extract  from  that  pape^ 
— now,  unfortunately,  out  of  print. 

The  first  thing  which  will  be  noted  on  inspection  of  this  chart,  is  the 
quirl;erly  fluctaation,  exhibiting  an  almost  invariable  increase  in  the 
demand  of  the  public  upon  the  Bank,  from  the  second  week  in  each  quarter 
up  to  the  first  week  in  the  following  one.  This  is  accounted  for  by  the 
gradual  absorption  of  the  means  of  the  public  through  the  collection  of 
revenue,  and  the  release  of  these  funds  by  the  payment  of  the  dividends. 

This  short  and  superficial  wave  is  accompanied  by  another,  not  so  easily 
detected  (because  sometimes  absorbed  in  a larger  movement)  and  more 
difficult  to  account  for.  It  has  an  annual  increment  and  collapse,  and  is 
doubtless  connected  with  the  action  of  the  seasons  upon  trade.  In  the 
midst  of  other  disturbances  this  wave  may  be  traced  in  the  magnitude  of 
the  operations  of  the  third  and  loru’th  quarters,  and  the  almost  invariable 





lull  in  the  second  quarter  of  the  year ; the  tliird  quarter  being  generally 
marked  by  rapid  increase  in  the  demand  for  accommodation  at  the  Bank. 
The  culminating  point  of  the  movement  originating  in  the  third  quarter  of 
the  year,  appears  to  be  a moment  favorable  to  the  bursting  of  those 
periodical  storms,  in  which  the  commercial  difficulties  of  the  country  find 
their  crisis. 

“ These  disturbances  are  the  accompaniment  of  another  wave,  which 
appears  to  have  a decennial  period,  and  in  the  generation  of  which,  moral 
causes  have  no  doubt  an  important  share.” 

The  first  two  of  the  uniformities  here  specified  clearly  resolve 
themselves  into  those  common  and  calculable  displacements  of 
Capital  which  result  from  the  settlement  of  a due  claim, — the 
same  in  kind  as  the  payment  of  a bill  or  debt  at  maturity.  They 
are  simply  transactions,  or  congeries  of  such,  linked  in  regularity 
with  certain  dates  of  the  calendar,  with  the  break-up  of  ice  in 
northern  seas,  or  with  the  ingathering  of  the  world’s  harvests, 
but  they  tell  us  nothing  of  the  occult  forces  which  swell  or 
diminish  the  volume  of  transactions  through  a procession  of  years. 
They  are  indeed  “ waves,”  as  distinguished  from  the  current 
or  the  tide. 

But  the  third  kind  of  disturbances  referred  to  by  Mr.  Langton 
is  very  different.  Occurring  with  almost  the  same  exact  regularity 
as  the  fluctuations  just  noticed,  there  is  nothing  in  calendars  or 
seasons  to  give  at  once  the  signal  and  solution  to  these.  So  far  as 
we  can  see,  they  are  yoked  to  nothing  in  the  steady  sequences 
of  the  material  world.  We  have  here,  therefore,  facts  of  a new 
order,  dictating  the  search  for  cause  at  a deeper  level.  And  if 
this  circumstance  increases  the  difficult)’’,  it  also  enhances  the 
interest  of  the  enquiry.  The  subject  of  commercial  fluctuation 
will  acquire  a new  dignity  if  it  be  found  striking  its  roots  far 
below  the  level  of  its  physical  particulars,  and  proving  itself 
cognate  with  the  sciences  of  mind. 

The  first  and  most  suggestive  feature  of  these  events,  then,  is 
the  striking  uniformity  in  the  periods  of  their  occurrence.  Since 
Mr,  Langton’s  paper  was  written,  another  decade  has  passed, 


and  brought  with  it  one  more  Panic  to  strengthen  the  induction 
at  which  he  hinted.*  It  is  an  unquestionable  fact  that  about 
every  ten  years  there  occurs  a vast  and  sudden  increase  of  demand 
in  the  loan  market,  followed  by  a great  re\  ulsion  and  a temporary 
destruction  of  credit.  In  the  present  century  six  of  these  events 
have  been  distinctly  marked.  In  1815-6,  240  country  banks 
failed;  in  1825,  70  banks  shared  the  same  fate;  in  1836-9  a 
similar  revulsion  took  place,  but  was  divided  into  two  shocks, 
probably  by  peculiarities  of  the  harvests  in  that  decade ; and  of 
what  occurred  in  1847,  1857,  and  1866  I scarcely  need  remind 
you,  as  those  years  will  be  fresh  in  the  memories  of  most  of  those 
who  hear  me.f 

Now,  with  this  portentous  list  before  us,  two  conclusions 
present  themselves, craving  a little  emphasis  at  the  veiy  outset. 
One  is,  that  whatever  we  may  at  present  think  of  its  cause, 
of  its  practical  importance,  or  of  its  probable  continuance,  the 
periodicity  of  commercial  crisis  is  at  any  rate  a fact.  The 
other  is,  that  the  instances  are  already  too  numerous,  regular,  and 
persistent,  to  allow  any  foothold  for  a theory  of  fortuitous  coin- 
cidence. There  is  no  region  of  scientific  enquiry  in  which  the 
idea  of  so  distinct  and  prolonged  a series  occurring  ly  accident 
would  not  at  once  be  scouted. 

This  first  great  line  of  uniformity  hfiving  then  established 
itself,  we  naturally  survey  the  general  conditions  under  which 
commerce  has  been  carried  on  during  the  present  century,  with 
a view  to  discover  some  corresponding  and  corroborative  order 
of  things.  But  in  this  direction  the  generalising  instinct  is 
entireh  baffled.  The  conditions  of  trade  and  currency  during 

* M.  Coquelin,  writing  in  1848,  spoke  of  the  recurrence  of  Panics  as 
" presqtte  periodique."  The  two  decades  following  brought  their  punctual 
contributions  to  the  series,  and  the  limiting  adverb  may  surely  now  be 
suppressed. — Revue  des  Deux  Mondes,  1st  Nov.,  1848. 

t See  Synopsis  of  Commercial  Panics  in  England  during  the  present 
century.  (Page  fi.' 



the  last  six  decades  exhibit  no  uniformity  whatever  During 
that  period  the  import  and  export  trades  of  the  country  have 
enormously  increased  in  volume,  and  greatly  varied  in  their 
tributary  channels.  There  has  been  a regime  of  inconvertible 
paper  currency,  a regime  of  free  issues  of  convertible  paper 
currency,  and  finally  a regime  of  regulated  issues  upon  a metallic 
basis.  The  laws  of  banking  and  mercantile  association  have 
been  modified  in  every  conceivable  way.  During  the  same  period 
commerce  has  been  revolutionised  by  the  transition  from  monopoly 
to  free  trade;  and  the  material  basis  of  the  currencies  of  the 
world  has  received  a vast  and  sudden  addition  by  the  discoveries 
of  the  Californian  mines  in  1848,  and  those  of  Australia  in  1851. 

And  if,  turning  from  these  general  conditions,  we  inspect  the 
immediate  antecedents,  or  so-called  causes  of  Panics,  we  find  in  them 
an  equally  bewildering  diversity.  In  a subordinate  sense  certain 
mere  accidents  may  indeed  have  assigned  to  them  the  dignity  of 
causes;  as  when  we  say,  for  instance,  that  the  collapse  of  the 
great  railway  speculation  led  to  the  Panic  of  1847  ; and  that 
losses  in  the  American  trade  brought  on  the  crisis  of  1857.  But 
it  is  evident  that  these  incidental  causes  do  not  account  for  the 
feature  we  hav’c  noted  as  common  to  the  whole  series,  that  of 
regularity  of  occurrence.  Other  evmnts,  equally  grave  in  character, 
have  occurred  in  the  intervals,  producing  a ceitain  pertuibation, 
which  passed,  however,  without  culminating  in  Panic.  There  was,  for 
instance,  the  Russian  war,  which  gave  to  English  commerce  some 
anxious  moments.  An  event  still  more  tremendous  in  its  bearings 
on  trade,  the  collapse  of  the  Southern  Confederaev  in  1861,  could 
1 only  develope  at  the  time  a semi-,  or  pseudo-Panic,  followed  by 

some  restoration  of  confidence,— the  real  periocUcal  revulsion 
» occurring  in  1866,  only  one  year  in  advance  of  the  usual  decennial 

period;  a small  deflection  from  the  ordinary  course  ot  things, 
showing  how  little  the  action  of  the  normal  causes  of  Panic  could 
be  accelerated  by  so  vast  an  addition  of  external  force. 

We  entirely  fail,  therefore,  to  trace,  either  in  the  general 



commercial  conditions  of  the  whole  period  which  is  the  area  of  1 

research,  or  amongst  the  incidents  which  precipitated  the  six 

great  crises  omhraced  within  it,  any  succession  of  things  so  similar 

in  their  nature  and  their  order  of  occurrence,  as  to  coi respond 

with  the  uniformity  of  those  events.  The  former  do  not  group  - 

themselves  in  any  apparent  relation  to  the  latter ; and  we  can  no 

more  infer  the  ixistence  of  such  relation  than  we  could  suppose  ^ 

the  tidal  movements  of  seas  to  correspond  with  the  action  of 

submarine  volcanoes,  or  with  the  chance  transit  of  vessels,  though 

they  were  as  huge  as  the  Great  Eastern.  This  remark  is  specially 

applicable  to  the  popular  scape-goat  of  cuirency  legislation,  of 

whose  clianges  the  grim  genius  of  Punic  seems  to  take  no 

cognisance  whatever.  The  successive  acts  afifecting  tbe  medium  of 


exchange  in  the  present  century  have  been  already  specified ; and 

when  we  add  that  revulsions  have  occurred  equally  under  systems 

of  metalli:  currency,  debased  or  pure,  and  under  the  widest 

diffusion  of  paper  money,  with  or  without  the  attribute  of  legal 

tender,  it  seems  futile  to  look  for  any  guiding  symptom  of  i 

correspondence  in  this  direction.  This  need  not  imply  a doubt  of 

the  fact  that  modes  of  currency  adjustment  have  a powerful 

influence  in  aggravating  or  mitigating  the  evils  of  the  crisis  when 

developed,  and  that  such  modes  should  therefore  be  carefully 

studied  and  cautiously  applied ; but  the  lesson  of  facts  up  to  this 

period  is,  surely,  that  the  elements  which  develope  commercial 

crises  are  too  deep  and  subtle  to  be  conjured  out  of  existence  by 

any  legislative  manipulation  of  currencies. 

Obtaining,  then,  only  these  negative  results  from  the  plan  of 
questioning  general  antecedents,  we  may  now  try  the  effect  of 
inverting  the  process,  and,  following  the  ordei'  of  the  phenomena, 
enquire  into  the  nature  of  the  changes  they  indicate  or  produce, 
still  with  a view  to  detect  the  existence  of  any  corresponding 
successional  order  of  things.  By  patient  use  of  this  method  I 
think  we  shall  meet  with  evidence  leading  us  up  to  the  further 
generalisations,  that  the  decades  interposed  between  the  great  com- 

k.  L 


mercial  crises  are  normal  cycles  of  developement  of  Credit  under 
certain  existing  conditions;  that  during  each  of  those  decades 
commercial  Credit  runs  through  the  mutations  of  a life,  having  its 
infancy,  growth  to  maturity,  diseased  over-growth,  and  death  by 
collapse ; and  that  each  cycle  is  composed  of  well-marked  normal 
stages,  corresponding  to  these  ideas  in  nature  and  succession.  And 
as  Credit  is  a thing  of  moral  essence,  the  external  character  of 
each  stage  of  its  devolopement  is  traced  to  a parallel  change  of 
mental  mood,  and  we  find  the  whole  subject  embraced  under  the 
wider  generalisation  of  a normal  tendency  of  the  human  mind. 
To  this  tendency — that  is,  the  tendeneg  of  the  faculty  of  credit  to 
gyQK- — may  be  attributed  the  evolution  of  stages  in  a uniform 
order,  each  having  a distinct  phenomenal  character;  and,  opeiating 
as  it  does,  under  the  existing  conditions  of  an  island  nation,  with 
vast  accumulated  wealth,  of  energetic  temperament  and  a low 
average  of  economical  training,  the  same  tendency  is  determined  to 
the  completion  of  its  cycle  of  developement  within  ordinary  periods 
of  ten  years.  This  particular  division  of  time  we  accept,  of  course, 
as  a simple  fact  of  observation.  The  number  of  years  might  have 
been  five,  or  fifteen,  or  twenty  ; and  I have  no  more  mission  to 
account  for  its  not  being  so  than  the  astronomer  has  to  account  for 
the  time  occupied  by  the  diurnal  and  annual  revolutions  of  the 
earth.  The  one  important  matter  is  the  successional  order,  as  first 
suggested  by  the  fact  of  periodicity ; and  that  order  is  important 
chiefly  as  a guide  to  parallel  inductions,  forming  a gradus  by  which 
we  may  arrive  at  a true  theory  of  cause. 

In  the  course  of  our  investigation,  then,  we  shall  probably  find 
that  the  malady  of  commercial  crisis  is  not,  in  essence,  a matter  of 
the  purse  but  of  the  mind^  And  regret  it  as  we  may,  it  seems  as  if, 
for  the  present,  these  rapid  mercantile  mutations  were  as  inevitable 
as  the  periodical  tempests  which  clear  the  atmo.sphere  of  tropical 


^JPollowing  the  course  of  any  one  of  these  decennial  cycles  we 
shall  observe  that,  mutatis  mutandis^ — due  allowance  made  for 



incidental  disturbances  from  wars,  exceptional  harvests,  &c.-^each 
stage  is,  in  the  main,  like  the  same  stages  in  other  cycles. 

After  the  violence  of  a crisis  has  subsided,  it  becomes  clear  that 
it  is  not  upon  Capital,  nor  even  upon  legitimate  commerce  that 
the  blow  has  fallen  heaviest.  As  a rule.  Panics  do  not  destroy 
Capital ; they  merely  reveal  the  extent  to  which  it  has  been 
previously  destroyed  by  its  betrayal  into  hopelessly  unproductive 
works.  Capital  productively  fixed,  Capital  engaged  in  manufacture 
and  trade,  continues  to  fractify,  though,  for  the  time,  only  to  that 
minimum  extent  of  production  and  distribution,  below  which  the 
current  necessities  of  the  world  prevent  it  from  falling.  But 
there  is  a change.  Something  has  passed  away,  and  left  an  appalling 
blank  behind  it.  It  is  that  subtle,  and,  within  certain  limits, 
most  useful  agency  by  which  inert  and  jealous  Capital  is  mobilised 
and  tempted  forward  into  new  channels  of  enterprise.  That  agency 
is  Credit. 

Now,  in  defining  this  important  element  in  the  subject  of  Panics 
it  is  essential  that  nothing  be  misunderstood,  and  I am  therefore 
compelled  for  a moment  to  deal  with  more  rudimentary  matters 
than  I like  before  this  Society.  There  is  a sense  in  which  Credit 
— even  commercial  Credit — never  dies : if  it  did  we  should  be 
reduced  to  the  primitive  stage  of  production  and  barter,  limited  to 
the  personal  wants  of  each  individual.  In  this  sense  the  value  of 
some  things  which  appear  to  have  intrinsic  value  of  the  most  solid  and 
immutable  kind,  depends  really  upon  Credit.  I have  a piece  of 
gold  in  my  pocket ; but  its  value  is  not  in  my  pocket : it  is  in  your 
minds  and  the  minds  of  the  whole  human  race.  The  intrinsic 
value  of  a sovereign  to  myself  personally  is  so  small  as  to  be 
practically  nil ; it  is  greatly  less  than  that  of  the  loaf  which  can 
be  bought  with  a fortieth  fraction  of  it.  But  the  sovereign  passes 
from  my  hands,  and  through  the  hands  of  a thousand  other  persons, 
by  vurtuc  of  a mental  association  with  universal  acceptance  at  a 
certain  high  rate  in  exchange.  That  belief,  credo,  or  Credit  is  its 
value  : but  the  mental  process  is  so  instant  and  absolute  that  wo 


habitually  regard  the  value  as  intrinsic ; and  for  all  practical 
purposes  it  may  be  so  designated.  There  are  other  subjects  of  this 
Credit  or  belief,  in  regard  to  which  the  mental  process  is  less 
instant  and  absolute,  but  which  carry  with  them  so  much  of  the 
association  of  certainty  as  protects  them  from  the  ordinary  influence 
of  Panic.  Within  these  • limits  Credit  has  a perennial  vitality  in 
the  individual  assurance  of  universal  recognition.  But  beyond 
these  limits  there  is  an  outlying  mass  of  engagements,  chiefly  in  a 
documentary  fonn,  acknowledgments  of  debt,  with  or  without 
specified  time  of  redemption— the  substance  of  which  is  for  the 
time  invisible — and  the  redemption  of  which  is  a matter  of  more 
or  less  certainty,  more  or  less  doubt.  It  is  amongst  these  that 
Credit,  in  its  ordinary  sense,  partaking  somewhat  of  the  nature  of 
faith  in  things  unseen,  has  its  perfect  work ; and  it  is  in  relation 
to  these  that  Credit  experiences  the  decennial  changes  to  which  I 


Broadly  defined,  then,  Panic  is  the  destruction,  in  the  mind,  of  a 
bundle  of  beliefs.  As  a first  result  of  that  destruction,  a mass  of 
paper  documents,  the  outward  expressions  of  those  beliefs  from 
which  they  derived  their  circulating  force,  becomes  a mere  dead 
residuum,  lea'sdng  a void  which  can  only  be  filled  by  other  agents 
possessing  that  vital  grasp  on  belief  which  they-  have  lost.  And  the 
void  imisthQ  filled.  The  volume  of  transactions  and  engagements 
cannot  immediately  be  reduced.  But  Panic,  the  most  rigorous  of 
realists,  rejects  the  dead  symbols  of  Credit,  and  exacts  Capital  in 
the  mohlU  form  of  currency.  Suum  cuique  is  now  the  universal  rule, 
and  everybody  reclaims  his  own.  The  usual  magazines  of  Capital 
in  that  form  are  rapidly  drained,  and  the  rate  of  its  hire  is 
proportionately  raised.  The  Panic  period  is  therefore  maiked  by 
great  scarcity  of  mobile  Capital ; because,  though  not  less  in 
quantity  than  before,  it  is  drafted  off  into  a thousand  unusual 
channels  to  perform  the  functions  commonly  exercised  by  Credit. 

. L 



The  first  following  stage,  which  we  may  call 

The  Post-Panic  Period, 

is  marked  by  an  exactly  opposite  condition — that  of  plethora.  By 
which  I mean,  not  merely  an  absolute  increase  in  the  stock  of 
bullion  and  in  private  deposits  with  the  Bank.  Though  the 
increase  in  that  sense  is  real,  the  plethora  is  much  more  obvious  in 
the  sense  of  the  relation  between  supply  and  demand.  An  increase 
of  a few  millions  in  the  resources  of  the  Bank  would  not  be  so 
much  felt  if  it  did  net  happen  that,  concurrently  with  such  increase, 
there  is  a great  falling  off  in  the  aggregate  of  obligations  tendered 
for  discount  that  is,  in  the  demand  for  loans.  The  plethora  is 
produced  then  : 

1st.  As  a secondary  consequence  of  the  new  mental  mood  of  the 
lending  classes,  the  owners  of  loanable  Capital.  The  first  con- 
sequence of  that  mood  was,  as  we  have  seen,  excessive  scarcity  ; 
because,  in  the  supreme  moment  of  the  crisis,  the  grasp  of  each 
capitalist  closed  tight  upon  his  own  means,  and  the  Banks  rushed 
to  strengthen  their  reserves  against  possible  emergencies.  But 
when  that  moment  has  passed,  and  its  first  terror  has  subsided,  the 
private  capitalist  no  longer  feels  the  instinct  of  self-preservation, 
demanding  absolute  personal  possession  of  his  means,  and  the 
Banks  are  relieved  from  the  necessity  of  enormous  resources  in  their 
own  tills.  The  Capital  thus  released  from  durance,  does  not  at 
once  flow  back  into  the  channels  of  loan  and  discount,  from  which 
it  had  so  suddenly  been  withdrawn.  Like  the  uneasy  swell  of  the 
sea  after  the  turbulence  of  recent  tempest,  there  is  a remainder  of 
distrust,  quieter  but  more  enduring,  and  this  dictates  a much  more 
rigid  selection  of  securities,  and  concentrates  the  deposit  of  loanable 
Capital  upon  a few  important  centres.  Gold  and  notes  flow  back 
into  the  Bank,  either  directly,  or  through  the  deposited  reserves  of 
other  Banks,  causing  a great  accumulation  of  unused  resources  in 
the  chief  financial  depot,  the  Bank  of  England. 

The  prevailing  mental  mood,  as  affecting  the  harrowing 
classes,  is  equally  efficient  in  inducing  plethora.  In  such  times  it 
is  as  dangerous  to  borrow  as  to  lend,  and  the  inducement  to  borrow 


is  greatly  diminished.  If  an  expansion  of  Credit  has  a tendency  to 
raise  prices  and  profits  (as  shown  by  Mr.  Mill  in  the  1 2th  chapter 
of  his  “ Political  Economy”)  the  collapse  of  Credit  has  a tendency 
to  depress  both,  and  much  more  rapidly.  The  legitimate  trader 
who  employs,  in  addition  to  his  own  means,  a proportion  of 
borrowed  Capital,  under  pledge  of  his  Credit  in  the  form  of  bills 
based  on  his  transactions,  has  found,  in  the  moment  of  crisis,  the 
conjuring  power  of  his  name  utterly  vanished,  and  has  been 
compelled  to  provide  for  inexorably  maturing  obligations  by  the 
forced  sale  of  goods  or  produce  at  such  prices  as  would  tempt 
forth  reluctant  Capital.  But  he  who  sells  thus,  does  not  buy. 
Credit  has  become  a curse,  and  he  will  deal  in  it  as  little  as 
possible.  As  the  effect  of  a wide  experience  of  this  kind  on  the 
part  of  the  borrowing  classes,  the  volume  of  transactions  which 
arc  effected  by  the  aid  of  bills  and  discounts  is  largely  reduced. 
This  particular  cause,  however,  of  plethora,  might  prove  but  a 
transient  one,  if  the  effects  of  the  crisis  upon  profits  were  transient. 
Other  things  being  equal,  borrowers,  tempted  by  a low  rate  of 
interest,  would  sooner  recover  from  Panic  than  lenders.^  But  other 
things  arc  not  equal.  The  effects  of  commer  ual  Panic  gradually 
percolate  through  all  classes.  Economy,  enforced  on  great  numbers 
of  people  by  losses  from  failures  and  from  depredated  investments, 
restricts  their  purchasing  power;  and  a diminished  wages-fund 
does  the  same  thing  in  relation  to  the  working  classes.  Profits  are 
kept  down  to  the  stunted  proportions  of  demand  ; purchase  and 
production  are  carried  on,  as  we  say,  “ from  hand  to  mouth  ; ” and 
merchants  are  reduced  to  doing  what  they  significantly  call  “ a 
retail  trade.”  The  accumulation  of  unusi  d Capital,  therefoie, 
receives  no  check  from  an  increased,  or  even  an  ordinary,  creation 
of  pledgeable  securities  to  compete  for  loans. 

These  two  processes  may  be  considered  the  chief  internal  causes 
of  the  plethora  of  unused  Capital  which  marks  the  Post-Panic 
period.  There  is,  however  an  external  process,  co-operating  very 
powerfully  towards  the  same  result.  It  is, 

MK.  JuH.N  .M1U>, 

oi-d.  Ihe  movemeut  of  the  foreign  oxohaugus,  consequent  on 
the  collapse  of  Credit.  We  have  seen  that  the  expansion  of  Credit 
tended  to  raise  prices  and  profits.  But  as  regards  our  foreign  trade, 
there  is  a natural  limitation  and  corrective  of  too  rapid  a progress 
in  that  respect.  When  prices  in  England  lise  to,  or  beyond  the 
level  of  prices  in  other  countries,  foreigners,  seeking  of  course  the 
cheapest  market,  restrict  or  cease  their  purchases  here  ; the  area  of 
our  markets  is  diminished,  and  the  exchanges  become  adverse  to 
this  country.  The  exact  contrary  of  this  takes  place  when  prices 
are  suddenly  and  greatly  reduced  by  the  destruction  of  Credit.  In 
the  absence  of  any  other  disturbing  force,  the  tendency  of  such  an 
event  is  to  encourage  foreigners  to  buy  from  us,  and  to  turn  the 
exchanges  in  our  favour.  The  diminution  of  imports  caused  by 
the  concurrent  inability  or  unwillingness  of  the  English  merchant 
to  buy,  contributes  to  the  same  end.  The  exchanges  being  thus 
turned  in  our  favour,  the  tide  of  money-Capital  flows  towards  this 
country,  and  helps  to  swell  the  abundance  already  resulting  from 
the  internal  causes  before  specified. 

Under  these  influences  the  post-Panic  period  assumes  a marked 
character  which  I venture  to  call  normal,  because,  through  an 
experience  of  a number  of  such  periods,  we  observe  an  identity  of 
feature  in  the  great  accumulation  of  unused  Capital  and  the  ruling 
of  an  excessively  low  rate  of  interest ; and  a concurrent  identity  of 
mental  mood  in  the  revulsion  from  habitual  beliefs  It  is  of 
importance  to  carry  with  us  this  idea  of  the  normalism  of  the 
successive  phases, — because  accidental  modifications  frequently 
occur  which  may  distract  attention  from  the  main  lines  of  the  case, 
and  seduce  us  into  a search  for  remedies  where  they  cannot  be  found. 
The  present  period,  for  instanee‘^^with  a general  resemblance  to  the 
corresponding  periods  before-named,  has  shown  some  peculiar 
features  resulting  from  exceptional  circumstances.  The  internal 
causes  of  plethora,  following  the  mental  changes  of  the  lending 
and  borrowing  classes,  have  acted  as  they  always  did  and  ever  will 
do,  but  there  was  considerable  d ' ty  in  the  a'- ‘ion  of  the  external 

UX  CKEDIX  CVCLES,  AM)  lilK  UltlOlX  OF  COMMtllClAL  FA.N'ICS.  2d 

influence  upon  the  foreign  exchanges.  The  mistaken  interpretation 
put  by  foreigners  upon  Lord  Clarendon’s  celebrated  circular ; the 
unusually  long  retention  by  the  Bank  directors  of  the  Panic  rate 
of  discount ; the  existence  of  a prohibitory  tariff  in  America  ; and, 
above  all,  the  universal  certainty  that  cotton,  the  largest  staple 
of  English  manufacture,  and  the  most  influential  upon  the  course  of 
general  prices,  was  following  a downward  career,  and  would  drag 
with  it  commodities  in  general ; all  these  things  for  a time 
stemmed  the  tide  of  custom  which  would  otherwise  naturally 
have  flowed  to  our  shores.  English  Credit  was  comi)romised 
abroad,  and  foreigners  dared  not  buy  it;  English  commodities 
could  only  be  sold  retail  while  still  lower  prices  were 
looming  in  the  future.  Foreign  exchange,  therefore,  refused  to 
turn  in  our  favor,  and  we  saw  the  anomaly  of  10  per  cent,  and 
3 per  cent,  divided  by  only  twenty  miles  of  sea.  This  deviation 
from  the  usual  course  of  events  in  the  post-Panic  period  does  not 
weaken  the  doctrine  of  moral  causes.  The  destruction  of  bcueis 
extended  on  this  occasion  beyond  our  shores,  and  determined 
the  flow  of  Capital  into  other  channels  than  that  of  commerce  with 
England,  by  a simple  expansion  of  the  process  occurring  at  home. 

But  when  the  internal  causes  of  plethora  began  to  create 
sjTuptoms  of  returning  ease,  belief  in  England  began  to  be  re-form- 
ed, English  Credit  was  again  in  the  market,  the  exchanges  were 
reversed,  foreign  Capital  flowed  in  and  accelerated  the  fall  of  our 
rate  of  interest  to  the  level  of  other  countries. 

The  post-Panic  period,  thus  marked  by  plethora  of  unused 
Capital  and  dormancy  of  enterprise,  has  commonly  extended  over 
two  or  three  of  the  first  years  of  these  decennial  cycles  of  CrediU 
The  quai’terly  and  annual  variations  in  the  Bank’s  resources 
proceed  with  their  usual  regularity  ; but  the  average  resers'e  is  one 
of  steady  abundance,  and  the  rate  of  interest  almost  uniformly 
low.  ^0  doubt  a new  confidence  begins  to  germinate  early  in  this 
period,  but  its  growth  is  slow^  The  old  race  of  traders  have  still 
a vivid  remembrance  of  a “ black  Fi’iday  ” or  some  other  day  of 



equally  sombre  hue.  Time  alone  can  steady  the  shattered  nerves,  and 
form  a heal  thy  cicatrice  over  wounds  so  deep.  And  that  process  suffers 
rude  interruptions.  Houses  which — survivnig  the  fii’st  shock — were 
rendered  too  weak  to  endure  through  a long  period  of  dormancy 
and  doubt,  occasionally  succumb,  and  so  renew  unpleasant  sensa- 
tions, and  impede  the  nascent  growth  of  Credit,  f^n  the  main, 
however,  there  is  progress.  Speculation  having  long  ceased  to 
forestall  the  markets,  the  actual  wants  of  the  world  begin  to 
emphasise  demand,  and  so  to  tell  upon  prices.  New  and  young 
firms  begin  to  be  formed,  with  no  drag  of  deterrent  experience 
upon  their  movements,  and  anxious  to  he  “ doing  business.” 
Even  old  firms,  though  less  eager  and  more  wary,  are  wushful  to 
utilise  the  costly  apparatus  they  are  compelled  to  keep  up,  and  to 
fill  the  gaps  in  their  Capital  oy  new  gains.  If,  while  matters 
stand  thus,  any  .specially  favorable  incident  should  happen,  as  for 
instance,  the  clearing  from  the  horizon  of  political  disquiet,  we 
find  ourselves  fairly  in  what  we  may  call 

The  Middle  ok  Eevival  Period.  ^ 

Dui’ing  this  period  trade  may  be,  and  usually  is,  subject  to 
considerable  mutations,  from  such  causes  as  a bad  harvest,  like  that 
of  1853,  or  the  Russian  War,  in  1854,  or  the  American  Civil  War, 
in  1861  ; and  the  supply  of  loanable  capital  may  vary,  the  rate 
usually  ranging  from  4 to  7 per  cent.  ; but  even  [while  subject  to 
these  disturbances.  Credit,  in  the  main,  continues  to  grow  more 
robust,  enterprise  to  increase,  and  profits  to  enlarge.  In  fact,  and 
notwithstanding  all  drawbacks,  this  ma}^  bo  considered  the  healthiest 
period  of  our  commercial  life,  and  that  in  which  accumulations 
from  real — as  distinguished  from  merely  nominal  profits — attain 
their  highest  developemcnt.  During  the  last  decade  this  process 
was  singularly  rapid,  the  exports  having  already  attained  their 
maximum  in  1860;  and  nothing  can  more  clearly  show  the  full- 
blooded,  obstinate  vitality  of  Credit  during  these  middle  periods 
than  the  fact  that  in  the  succeeding  year,  (1861)  which  saw  the 






outbreak  of  the  great  American  convulsion,  the  exports  only  fell  off 
between  1 and  2 per  cent.,  and  even  in  the  following  year  (1862) 
only  about  8 per  cent. 

It  is  in  these  periods  that  new  commercial  and  manufacturing 
concerns  mostly  spring  into  existence,  tempted  by  the  high  ratio  of 
current  pi’ofits.  We  have  no  means  of  estimating,  as  I should 
wish,  the  annual  accession  to  the  ranks  of  competition  at  this  or 
any  other  period.  It  has  been  stated  that  the  penonnel  of  the 
militaiy  service  is  changed  in  an  average  period  of  12  years  ; but 
assuming  a much  less  rapid  rate  of  changes  in  the  commercial 
world, fit  is  clear  that  before  the  sixth  or  seventh  year  of  the  decade, 
and  after  two  or  three  years  of  lucrative  trade,  there  must  be  a 
large  per  centage  of  new  men,  to  whom  the  grim  stroy  of  past 
panics,  and  of  the  nemesis  of  over-speculation,  is  a mere  myth,  or 
at  most  a matter  of  hear-say  tradition.  We  know  the  tendency  of 
the  human  mind  to  take  from  present  conditions  the  hues  of  a 
forecasted  future  ; and  not  less  certain  is  the  unfortunate  fact  that 
the  existing  system  of  culture  amongst  our  commercial  classes  is 
but  little  adapted  to  correct  the  want  of  personal  experience.  It  is 
the  student  who  watches  for  movements  and  changes ; the  great 
majority  of  men  habitually  assume  that  what  is  is  what  will  he, 
and  it  is  under  the  influence  of  this  idea  that  a healthy  growth 
gradually  merges  into  dangerous  inflation.  ConcuiTently  with  this 
state  of  matters,  the  actual  increment  of  Capital  from  profits  begins 
to  overflow  the  usual  channels  of  investment ; and  in  seeking  foi 
new  channels,  the  hahit  of  contemplating  a high  scale  of  profits 
makes  men  look  over  old-fashioned  modes  of  investment  to  others 

which  promise  better  things. 

From  these  combined  causes  the  middle  period,  marked  bj 
revived  trade  and  sound  credit,  changes  into  what  may  well  be 


Tue  Speculative  Period. 

To  avoid  misapprehension  it  is  needful  here  to  explain  the  sense 

in  which  this  phrase  is  used.  If  the  Dictionary  meaning  of  the 




26  :klK.  JOHxV  MILLS, 

word  Speculation  be  adopted  : i.  e.  “ tlie  act  or  practice  of  buying 
stocks,  or  goods,  &c.,  in  the  expectation  of  a rise  of  price,  and  of 
selling  them  at  an  advance,”^  we  find  that  the  dividing  line 
between  speculation  and  ordinary  trading  is  very  obscure, — that,  in 
fact,  no  act  of  commerce  is  entirely  free  from  the  speculative 
element,  and  that  speculation  is  more  or  less  at  work  through  every 
period  of  the  Credit-cycle.  It  is  also  true  that  speculation  is  in 
many  cases  a very  useful  agent  in  equalising  the  distribution  of 
commodities,  and  supplying  the  urgent  wants  of  communities,  and 
is,  therefore,  by  no  means  worthy  of  the  unqualified  censure  some- 
times awarded  to  it.  Tlie  whole  question  is  one  of  degree  and  of 
conditions — of  degree  relatively  to  conditions.  That  is  to  say,  an 
amount  of  speculative  trading  which  at  one  period  would  bo 
moderate  and  healthy,  would  at  another  period  be  excessive  and 

And  I cannot  but  think  that  the  main  condition  in  determining 
this  difference  is  the  state  of  Credit  for  the  time  being.  We  have 
traced  the  progress  of  that  element  through  two  periods  of  its 
growth,  and  have  noted  its  action  in  raising  prices  and  profits.  We 
noted  also  that  speculation  was  carried  to  a trifiing  extent  in  the 
first  period,  and  only  to  a moderate  extent  in  the  second ; but,  if  it 
were  supposable  that  speculation  could  have  been  indefinitely 
extended  in  those  periods,  a large  extension  would  have  been  much 
less  likely  to  prove  excessive  and  hurtful  then,  than  it  would  in  the 
third  period,  because  at  that  time  Credit,  and  with  it  price,  was 
broadly  based  upon  a mass  of  unengaged  Capital,  and  there  was  less 
danger  of  the  sudden  and  ruinous  fall  of  prices  which  always  accom- 
panies a collapse  of  Credit.  There  was,  in  fact,  a healthy  equipoise 
between  the  two.  Unfortunately,  however,  in  the  absence  of 
adequate  foresight  and  self-control,  the  tendency  is  for  speculation  to 
attain  its  most  rapid  growth  exactly  when  its  growth  is  most 
dangerous;  that  is,  when  Credit  has  become  inflated  out  of  pro- 
portion to  the  reserves  of  loanable  Capital.  And  after  this 

**  Webster. 


inflation  has  commenced.  Credit  and  speculation  act  upon  each  other 
as  reciprocal  stimulants.  Inflated  Credit,  by  elevating  prices  and 
profits,  tempts  to  further  speculation ; and  speculation  can  only  be 
carried  on  by  multiplying  instruments  of  Credit. 

And  what  is  it,  then,  that  really  underlies  this  new  condition  of 
things  ? It  is  a further  change  in  the  mental  mood  of  traders. 
Medical  men  tell  us  of  some  forms  of  physical  disease  which  are 
the  result  of  a gradual  exaggeration  of  healthy  functional  action,  the 
transition  from  the  healthy  to  the  morbid  state  being  made  without 
any  distinct  demarcation  between  the  two.  The  social  mind  is 
subject  to  similar  changes.  There  is  a morbid  excess  of  belief,  an 
hypertrophy  of  belief,  induced  by  an  excess  of  nourishment  to  that 
faculty  of  the  mind.  In  the  speculative  period  under  review,  the 
healthy  confidence  which  marked  the  middle  period  has  degenerated 
into  the  disease  of  a too  facile  faith.  The  one  fact  of  an  apparent 
profit  is  for  the  mument  held  as  full  warrant  for  ever  new  com- 
mitments. And  this  is  not  confined  to  the  commercial  classes. 
The  investing  class  of  non-traders  easily  takes  the  infection.  And, 
as  demand  always  stimulates  supply,  there  is  at  such  times  no  lack 
of  channels  for  the  inflow  of  this  confidence;  every  one  of  them,  of 
course,  a Pactolus.  The  admirable  modern  invention  of  Joint 
Stock  Companies  has  an  almost  infinite  absorbent  capacity ; and 
the  crowd  of  morbid-minded  investors  in  financial  and  industrial 
enterprises,  of  various  degrees  of  merit,  do  not,  in  their  excited 
mood,  think  of  the  pertinent  questions,  whether  their  capital  will 
become  quickly  productive,  and  whether  their  commitment  is  out  of 
proportion  to  their  means.  The  commercial  and  investing  classes 
thus  come  under  an  enormous  amount  of  obligation,  dependent  foi 
its  success  upon  the  one  precarious  condition  of  a continuance  of 
the  existing  scale  of  prices.  Two  things  now  usually  occur  : 

1st.— There  is  a line  beyond  which  prices  cannot  be  pushed  by 
any  extension  of  Credit,  without  breaking  down  the  purchasing 
power  of  the  world’s  markets.  Side  by  side,  if  not  pari  passu,  with 
mercantile  enterprise  here,  foreign  competition  has  been  progressing* 


28  Mil.  JOHJT  MILLS, 

Speculation,  growing  more  and  more  reckless,  has  thrown  goods 
upon  the  markets  faster  than  they  can  be  absorbed,  producing  an 
oppressive  glut,  beneath  which  prices  must  inevitably  give  way. 

With  the  first  symptoms  of  such  a result,  renewals  of  Credit 
become  more  difficult,  and  sales  of  goods  more  imperative.  Prices 
consequently  recede  further,  and  then  further ; and  the  downward 
impulse  being  once  given,  it  does  not  cease  until  the  fall  is  out  of 
all  proportion  to  the  previous  gradual  ris^  In  two  months  of  1857, 
the  average  fall  thns  produced  was  over  30  per  cent. ; and  if  the 
phenomena  Avere  not  so  startlingly  distinct  in  the  middle  of 
1866,  it  was  because  the  previous  abnonnal  position  of  our  greatest 
staple  trade  had  to  some  extent  discounted  the  process. 

2nd  — When  prices  begin  to  waver,  the  strain  which  commercial 
Credit  preAnously  bore,  is  thrown,  not  merely  upon  the  reserves  of 
loanable  Capital,  but  upon  those  usually  stable  forms  of  Credit 
which  are  representative  of  public  works,  such  as  railways.  These 
securities  are  always  largely  pledged,  and  the  institutions  holding 
them  are  at  such  times  driven  to  realise  at  current  values  in 
exchange.  This  crucial  test  throws  a new  light  upon  the  dangerous 
rapidity  with  which  Capital  has  been  fixed  in  these  Avorks,  and 
reveals  hoAV  far  even  Credit  is  committed  to  further  works  of 
postponed  productiveness.*^  At  a critical  period  such  securities 
become  practically  useless — almost  as  if  this  great  portion  of  the 
resources  of  the  country  had  been  sunk  in  the  surrounding  sea.  I 
am  inclined  to  think  such  a discovery  one  of  the  worst  propogators 

* The  aggregate  of  railway  investment  on  the  1st  July  last  -was  upAvards 
of  400  milions,  the  greater  portion  of  which  has  been  tainted  with  discredit. 

Even  the  sinister  speed  of  suspicion,  however,  cannot  permeate  so  vast  a mass 

as  this  during  the  usually  brief  stage  of  acute  Panic.  But  as  the  first  access  of 

doubt  is  more  than  justified  by  the  investigations  to  which  it  leads,  the  post- 

Panic  period  is  now-a-days  characterised  by  a chronic  state  of  break-down  1 

in  Railway  Credit.  The  graphic  account  given  by  Mr.  NeAvmarch  (vol.  5) 

of  the  Railway  <fiscredit  in  1849,  which  AV'as  said  to  have  entailed  a loss  of 

180  millions  sterling  during  one  month  only,  exhibits  a remarkable  parallel 

to  the  events  of  1867. 


of  Panic, — only  less  fatal,  indeed,  than  would  be  a doubt  of  the 
conA^’ortibility  of  the  Bank  note.  It  is  as  if  an  army,  Avhile 
struggling  with  the  enemy,  should  learn  that  its  lines  of  leticat 

were  in  peril. 

jOf  the  natural  sequel  to  these  things,  the  failure  of  great  banks, 
discount  companies,  and  mercantile  firms,  I say  nothing.  They 
are  the  symptoms  incident  to  the  disease,  not  the  disease  itself. 
Nor  is  there  much  scientific  interest  in  the  circumstance  that  these 
revulsions  usually  occur  in  the  Autumnal  quarter,— a nile  not 
without  exception,  as  we  saw  in  1866.  From  causes  well 
ascertained,  there  is  in  that  quarter  always  an  increase  in  the 
demand  for  ready  money  | and  when  Credit  is  aheady  in  its 
critical  stage  of  inflation,  this  extra  stress  finds  out  the  peccant 
link  in  the  chain  whose  strength  is  the  strength  of  its  weakest 
part^  Possibly  also  the  season  of  gloom  and  decadence  may  have 
a certain  predisposing  tendency.  Men’s  cretfos  are  scarcely  so 
Augorous  in  the  proverbial  month  of  suicides  as  they  are  in  the 

youth  of  the  year. 

Through  the  normal  cycle  of  credit  we  have  now  worked  our 
way  again  to  a point  corresponding  to  that  where  I stated  that 
Panic  was  “the  destruction  of  a bundle  of  beliefs.”  The  road  we 
haA’e  traversed  was  found  clearly  enough  divided  into  three  stages : 

1.  The  Post-panic  period,  marked  by  plethora  of  reserve 

Capital,  and  dormancy  of  speculation. 

2.  The  Middle,  or  Revival  period,  marked  by  increasing  trade, 

moderate  speculation,  and  a sound  state  of  Credit. 

3.  The  Speculative  period,  showing  inflation  of  Credit,  high 
range  of  prices,  unproductive  inA'estment,  and  excessive  commit- 
ments ; and  leading  to  Crisis  and  the  end  of  the  cycle. 

With  each  of  these  stages  there  appears  to  be  a concun’cnt 
change  in  the  mental  mood  of  the  trading  public;  and  these 
changes  are  the  same  in  each  decade,  and  follow  the  same  relative 
order.  Commencing  Avith  the  series  of  decennial  crises,  wo  have 
here  three  inductions,  mutually  corroboratiA’e,  and  leading  to  a 









fourth  and  final  generalisation,  in  the  fact  of  a mental  law  which 
embraces  and  subordinates  them  all.  Credit,  then,  we  know  to  be 
a thing  of  growth  through  normal  and  predicable  phases;  and, 
under  existing  conditions,  it  is  deciduous  at  intervals  of  about 
ten  years.  This  conclusion  is  only  a more  formal  statement  of 
the  “moral  causes”  which  Mr.  Langtou  conjectured  as  under- 
l}ung  his  “decennial  tides.” 

(jThe  phenomenal  results  of  the  influences  thus  sketched  will  be 
found  clearly  illustrated  in  the  Diagram,  (pagi3-8)  for  which  I am 
indebted  to  the  kindness  of  my  friend  Professor  Jevons,  and  which 
is  intended  to  show,  after  elimination  of  the  effects  of  accidental 
disturbance,  the  main  lines  of  tendency  through  a type-cycle  of 
Ci’edit,  so  far  as  they  are  ascertainable  from  existing  materials.  It 
should  be  clearly  understood  as  designed  to  exhibit  only  the 

general  character”  of  such  a cycle  of  fluctuation.  The  three  stages 
into  which  I have  divided  the  inter-critical  decade,  though  uniform 
in  their  order  of  succession,  do,  in  fact,  vary  in  length,  and  slide 
into  each  other  so  gradually,  that  the  dark  vertical  lines  which 
intersect  the  cur^^es  sifter  the  third  and  sixth  yc'ars  must  be  taken 
only  as  approximate  demarcations. 

The  features  of  the  Post -panic  period  are  thrown  into  strong 
relief  by  the  rapidly  ascending  curves  of  “Bullion”  and  “Bank- 
ing reserves,”  contrasted  with  the  steep  descent  of  the  lines 
“Inland  Bills,”  “Bills  in  Bank,”  “Prices,”  and  “Rate  of 
Discount.”  An  inverse,  but  more  gradual  movement,  is  shown  in 
the  lines  traversing  the  middle,  or  active  period.  The  story  of  the 
third,  or  speculative  period,  is  well  told  in  the  progressively 
sharpening  downward  curve  of  the  lines  of  “Bullion”  and  “Reserve,” 
and  the  general  but  unvaried  movement  of  the  lines  of  “ Inland 
Bills,”  “Bills  in  Bank,”  “Prices,”  “Railway  Expenditure,”  “Bank- 
ruptcy,”  and  “Rate  of  Discount.”  The  two  lines  showing  “Savings 
of  the  Working  Classes,”  and  “ Pauperism,”  are  noticeable  both  in 
their  relation  to  each  other,  (that  of  almost  exact  inversion)  and  to 
the  general  lines  of  tendency  throughout  tho  cycle.  The  com- 




paratively  tame  deflections  of  “Bank”  and  “ Countiy  Note 
Circulation”  illustrate  the  steady  and  subordinate  part  played  by  the 
Bank  note  where  there  is  an  economising  machinery  of  clearance, 
and  where  the  note  itself  is  issued  only  under  conditions  of  absolute 
guarantee ; and  the  contrast  between  their  character  and  that  of  the 
bold  curves  which  track  the  decadence  and  developement  of  pure 
Credit,  (bullion  and  reserve  in  one  direction,  and  bills,  prices,  and 
rate  of  discount  in  the  other)  gives  emphatic  support  to  my  position 
as  to  the  chief  factor  in  commercial  fluctuations.  .'IChe  slight  and  brief 
lift  in  the  line  of  “Bank  Circulation”  within  the  groove  of 
“ Collapse,”  will  be  recognised  as  resulting  from  the  issues  follow- 
ing tho  temporary  suspensions  of  the  Bank  Act. 

Thus  far  the  subject  of  Commercial  Credit  has  been  trcated 
mainly  as  if  its  developement  in  a given  course  were  the  result  of  a 
single  uncompounded  law ; and  this  has  been  purposely  done,  with 
a view  to  bring  my  chief  position  into  clearer  relief  than  would 
have  been  possible,  if  the  argument  had  been  encumbered  with 
references  to  modifying  causes.  The  growth  of  Credit  ?s,  how- 
ever, constantly  modified  by  the  economic  law  of  demand  and 
supplj’,  acting,  through  price,  as  between  Credit  and  Capital,  and 
tending  to  preserve  the  necessary  equilibrium  between  them.  I say 
“ the  necessary  equilibrium”  because,  in  fact.  Credit  cannot  long 
exist  without  it.  Belief  is  founded  upon  evidence,  and  must  be 
kept  in  contact  with  it.  Commercial  Credit,  is  based  upon  Capital, 
and  the  basis  must  be  kept  sufllcieutly  broad  for  tho  proportions  of 
the  superstructure.  Descending  to  detail,  we  know  that  a bill  of 
exchange,  the  concrete  form  of  Commercial  Credit,  is  nothing  apait 
from  the  belief  that  at  a specific  date  it  will  become  actual  Capital ; 
and  the  encashment  of  such  bill,  under  discount,  is  merely  a sale  of 
that  belief  at  a cash  price.  Subtract  the  belief  from  it  and  you 
may  as  well  put  the  bill  in  the  fire.  It  rests  upon  Capital,  and  upon 
Capital  only.  And  what  is  true  of  the  detail  is  true  of  the  mass. 
The  ratio  of  the  growth  of  Credit  prescribes  the  ratio  of  the  demand 
for  Capital,  and,  therefore,  the  rate  of  its  hire.  This  brings  in  the 







MR.  Jonx  MILLS, 

adjusting  element  of  price.  Credit,  •with  its  normal  tendency  to 
growth,  can  only  grow  under  the  stringent  condition  of  paying  a 
discount  proportioned  to  the  degree  in  which  its  growth  outruns 
the  supply  of  loan  Capital.  Experience  and  theory  alike  pronounce 
this  necessity  to  he  absolute.  Here,  therefore,  "we  are  confronted  with 
a new  force,  modifying  the  action  of  the  primary  force  which  impels 
Credit  through  its  normal  cycle.  We  have,  in  fact,  one  of  those 
cases  to  which  the  axiom  of  Mr.  Mill  is  applicable, — “The  joint 
effect  of  causes  is  the  sum  of  their  separate  effects, and  we  can 
no  more  omit  consideration  of  the  influence  of  the  economic  law  of 
demand  and  supply  on  the  developement  of  Credit,  than  the 
astronomer  coixld  leave  out  the  tangential  or  centripetal  tendency 
from  his  account  of  the  planetary  orbits. 

The  economic  law  of  Price,  always  benefleent  in  its  action,  is  in  no 
case  more  so  then  when  it  operates  at  the  fountain  head  of  mercantile 
resources.  On  the  one  hand  its  attractive;  force  upon  Capital 
replenishes  the  reserves  needful  to  sustain  Credit,  when  the 
competition  for  loans  has  increased : on  the  other,  by  bearing 
more  or  less  heavily  on  the  sensitive  surface  of  Profit,  it  applies  an 
effective  break  to  the  dangerous  velocity  with  which  a too  facile 
Credit  would  multiply  transactions.  In  both  ways  it  tends  to 
preserve  that  natural  and  (to  a country  like  this,  which,  besides 
trading  so  closely  up  to  its  own  means,  is  a centre  for  the  financial 
operations  of  the  world)  that  vitally  important  equipoise  between 
the  growth  of  bill-making  Credit,  and  the  supply  of  Capital  from 
accumulated  profits  and  sa-rings.  This  it  actually  effects  so  long 
as  the  faculty  of  Credit  is  undiseased.  We  have  seen  something, 
and  shall  presently  see  more,  of  the  reasons  why  it  is  not  always 
so  effectual. 

In  following  the  course  of  the  developement  of  Credit,  some 
allusion  was  made  to  incidental  disturbances  which,  for  a time, 
seemed  to  mask  the  operation  of  the  law  of  its  growth.  AVhen, 
however,  we  regard  that  law  and  the  economic  law  of  price  in 

System  of  Logic,  Yol.  1.,  Cap  vi. 



their  mutually  modifying  action,  many  of  these  apparent  episodes 
fall  into  the  general  course  of  progression,  and  the  line  of  inductive 
proof  becomes  more  continuous.  The  Post-Panio  period,  being 
one  of  comparatively  slight  fluctuation,  does  not  afford  many 
‘illustrative  instances,  but  we  may  cite  two  striking  incidental 
exaggerations  of  Credit,  and  consequent  demand  for  Capital,  which 
occurred  respectively  about  the  commencement  of  the  middle 
periods  of  the  last  two  cycles.  Putting  an  exceptional  strain  upon 
the  corrective  action  of  the  economic  law  of  price,  and  being  quite 
different  in  their  origins,  these  cases  are  the  more  valuable  as 
proving  a fortiori  the  case  in  respect  of  ordinary  fluctuations. 
The  first  arose  in  1852-3,  when  the  great  gold  discoveries  bogan  to 
swell  bullion  reserves,  to  elevate  the  prices  of  commodities, 
and  so  to  stimulate  enterprise,  just  recovering  from  the  dormant 
period  extending  from  the  collapse  of  1847.  Miith  this  new 
momentum  added  to  its  normal  rate  of  growth.  Credit  was  soon 
developed  to  great  proportions,  and  was  still  further  enlarged  by 
an  active  import  trade  in  wheat,  which  rose  in  price  through  the 
whole  of  1853,  attaining  a maximum  of  80s.  lOd.  per  quarter  m 
February,  1854.  The  creation  of  bills  increased  from  an  aggregate 
of  £62,700,000  in  the  second  quarter  of  1852,  to  £88,140,000  in 
the  third  quarter  of  1853;  and  the  bullion  reserves  dwindling 
from  a maximum  of  £21,880,000,  to  a minimum  of  £12,000,000, 
the  rate  of  discount  was  raised  by  steps  from  2 to  5^  per  cent., 
when  the  needful  supplies  flowed  in,  and  trade  was  carried  on  with 
ease  and  security.  One  indication  of  the  rapidity  and  extent  to 
which  Capital  responded  to  the  call  of  Credit  in  this  case,  is  the 
fact  that,  in  1853,  £12,600,000  of  Bullion  was  brought  to  the 
Mint,  and  passed  into  the  circulation  of  the  country. 

The  second  instance  had  a very  different  origin.  In  1860-1, 
first  the  anticipation,  and  then  the  reality  of  the  American  civil 
war  caused  a great  and  rapid  rise  in  the  price  of  cotton,  and  gave 
the  first  start  to  the  prices  of  other  fibres  and  of  general  commodities, 
after  the  dormant  period  which  followed  the  crisis  of  1857.  Great 


34  MR.  JOHN  MILLS, 

speculative  activity  led  to  the  creation  of  bills  to  an  extent  which 
pressed  heavily  on  the  reserve  of  bullion.  Owing  to  this  pressure 
the  hire  of  loans  rose  from  4 to  8 per  cent.,  and  the  needful 
supplies  being  then  attracted,  the  rate  fell,  in  1862,  to  24  percent. 
During  1861  and  1862  the  enormous  aggregate  of  17  millions  of. 
buUion  was  coined  at  the  Mint.  It  is  further  remarkable  that  in 
this  case  the  corrective  process  was  not  even  attended  with  any 
corresponding  fall  in  general  prices,  the  ratio  of  current  profits 
being  so  high  that  trade  was  able  to  boar  tlie  increased  cost  of 
loans  without  retreating  from  the  existing  level  of  price. 

These  cases  are  cited  as  distinctly  exemplifying  the  process  of 
adjustment  which  is  constantly,  if  not  always  obviously,  being 
carried  out,  so  long  as  the  two  correlative  laws,  of  growth  of  Credit, 
and  demand  and  supply  of  Capital,  are  in  free  and  healthy  action. 
Having  neither  wish  nor  space  to  launch  into  (currency  polemics,  I 
may  yet  remark,  in  passing,  that,  from  our  present  point  of  ^’iew, 
we  discover  little  inducement  to  disturb  the  harmonious  action  of 
these  natural  forces  by  any  such  artificial  appliance  as  that  which 
meets  with  favour  in  many  quarters,  of  answering  the  demand 
which  is  essentially  a demand  for  Capital,  by  an  extended  issue  of 
“ promises  to  pay.”  The  doctrine  of  equipoise  between  Credit  and 
Capital — founded  as  it  is  upon  the  mental  law  of  the  dependence  of 
belief  upon  fact — is  a doctrine  of  perfect  freedo/n,  with  the  one  sole 
condition  of  perfect  honesty.  To  adulterate  v ith  the  clement  of 
Credit  that  circulating  Capital  which  finally  settles  the  transactions 
embodied  for  a time  in  the  floating  forms  of  Credit,  is  neither  free 
trade  nor  fair  trade  ; while  it  is  fatal  to  the  balance  of  tendencies, 
on  which  the  well-being  of  all  trade  is  poised.  To  the  extent  that 
currency  based  upon  Credit  displaces  curiTeney  based  upon  its  own 
reserve  of  A'isible  Capital,  it  either  neutralises  the  economic  law  of 
demand,  or,  reversing  the  poles  of  the  magnet,  it  exerts  a repellant 
instead  of  an  attractive  influence  on  foreign  sujtplies. 

As  the  cycle  enters  its  third,  or  speculative  stage,  we  find  that  tliere 
is  no  need  of  any  such  artificial  additions  to  the  elements  of  danger. 


In  this  country  Credit  shows  such  natural  vigour  of  growth,  and  it 
grows  under  such  stimulating  conditions,  that  any  weighting  of  that 
side  of  the  scale  is  quite  out  of  the  question.  The  time  comes  too  soon 
when  our  two  laws,  while  they  continue  to  be  correlative,  tend  to 
become  less  and  less  coefficient.  The  adjusting  principle  is  still  at 
work,  but  under  the  influences  now  gathering,  it  becomes  by 
degrees  overborne,  and  at  last  overwhelmed.  The  Credit  end  of  the 
beam  is  too  far  depressed  to  be  raised  again  until  lightened  of  its  load 
by  a violent  process.  As  this,  however,  is  owing  to  the  relative 
default  of  Capital,  it  is  clear  that  no  amount  of  paper  promises, 
now  placed  in  the  opposite  scale,  would  redress  the  balance. 

But  how  has  this  relative  default  of  Capital  arisen  ? How  is  it 
that  the  economic  law  of  demand  and  supply  has  itself  ceased  to 
redress  the  balance?  Simply  because  enterprise  has  at  length 
thrown  itself  into  courses  which  cut  us  off  from  all  the  reservoirs 
of  supply  on  which  that  law  could  act,  and  has  hitherto  acted,  for 
our  benefit.  Banking  reserves,  the  loan-fund  on  which  current 
Credit  is  based,  are  replenished  from  domestic  and  foreign  sources. 
The  savings  and  floating  balances  of  our  people  arc  di'awn  more 
largely  into  those  reserves  by  an  increased  rate  of  interest.  Other 
countries  are  laid  under  tribute,  partly  and  mainly  through  the 
medium  of  ourforeign  commerce,  which  brings  some  returns  inbullion, 
and  partly  by  direct  foreign  investment  in  the  purchase  of  English 
bills.  In  highly  speculative  periods  large  drafts  are  made  upon  the 
reserves  so  procured,  for  permanent  investment  abroad,  as  in 
Government  loans,  or  banking  and  industrial  enterprises  ; and  still 
larger  amounts  are  fixed  in  works  of  postponed  productri  cness  at 
home.  Now,  it  is  not  merely  that  the  immense  sums  thus  expended 
are  taken  from  the  common  loan-fund  on  which  Credit  depends; 
a vast  amount  of  labour  is  diverted  from  the  production  of  the 
commodities  which  we  should  otherwise  export  to  adjust  the  pay- 
ment for  our  imports,  and  establish  a balance  in  our  favour.  In  the 
meantime  the  extent  of  our  commitments,  and  their  probable  effect 
upon  Credit,  are  not  unknown  to  foreigners,  who  become  proportion- 

36  ME.  JOHN  MILLS, 

ately  chary  of  buying  English  bills.  In  this  way  the  domestic 
and  foreign  sources  of  the  supply  of  loan  Capital  are  simultane- 
ously cut  off;  elevation  of  the  rate  of  discount  ceases  to  produce 
its  accustomed  effects ; and  nothing  remains  but  for  the  inverted 
pyramid  of  Credit  to  fall  by  its  own  weight. 

It  appears,  therefore,  that  at  a period  of  diseased  overgrowth  of 
Credit,  the  economic  law  of  demand  acting  upon  the  price  of  loan- 
Capital, — though  it  still  exerts  some  corrective  influence,  and  at 
any  rate  acts  as  a storm- warning,  like  the  hoisting  of  a Fitzroy 
drum, — does  not,  for  the  reasons  just  assigned,  succeed  in  maintain- 
ing the  etjuipoise  which  is  our  only  guarantee  against  disaster. 

Having  already  referred  to  the  mischievous  effect  which  would 
follow  the  common  proposal  of  extended  issues  of  currency  at  a 
time  when  normal  influences  were  fully  capable  of  controUing  all 
fluctuations,  we  may  well  consider  what  would  be  the  results  of 
such  a policy  when  Credit  has  reached  its  dangerous  state  of 

If  you  could  not  at  that  earlier  and  healthier  period  sustain  the 
edifice  of  Credit  upon  a mere  Credit  curi’ency,  how  are  you  to  do 
so  now  ? It  is  exactly  the  relative  excess  of  promises  over  the 
power  of  performance  that  is  the  most  salient  symptom  of  the 
disease ; a proposal  to  add  more  promises  to  the  number  is  not  a very 
hopeful  application  of  the  doctrine  similid  similihis  curantur. 
You  may  say  that  these  notes  are  convertible  into  gold  on  demand; 
but  your  hypothetical  gold  basis  may  be  already  rapidly  diminish- 
ing under  the  action  of  adverse  foreign  exchanges.  You  cannot 
induce  foreigners  to  accept  your  promises  in  payment,  and  if  you 
obtain  for  these  a domestic  circulation,  by  that  means  keeping  up 
the  volume  of  Credit  and  the  high  range  of  juices,  you  simply  set 
free  and  displace  a proportionate  amount  of  the  gold  which  alone  is 
effective  in  discharging  our  balances.  And  then  when  the  postponed 
but  inevitable  revulsion  arrives,  you  have  merely  succeeded  in 
adding  to  aU  other  critical  phenomena  the  currency  Panic  from 
which  we  have  been  happily  free  since  1844.  This  is  not  a matter 


of  theory  alone.  The  experiment  has  been  amply  tried.  During 
the  great  foreign  speculations  which  led  to  the  crisis  of  1825,  the 
Bank  of  England,  conscious  of  danger,  reduced  her  issues  some 
2^  millions  in  1824;  but  the  private  and  joint  stock  Banks  in 
the  same  period  expanded  their  issues  about  4^  millions,  and  70 
of  these  Banks  were  swept  out  of  existence  for  their  zeal  in  thus 
providing  “ an  elastic  currency.”  In  the  three  years  that  preceded 
the  crisis  of  1836-9  exactly  the  same  process  was  carried  out,  and 
with  exactly  similar  results.  On  reference  to  the  Diagram  (p.  8) 
it  will  be  observed  that  even  under  the  present  regulated  system, 
the  line  indicating  the  amount  of  “Country  circulation”  maintains  its 
upward  direction  long  after  the  line  of  “Bank  circulation”  has 
taken  a downward  curve;  showing,  (1.)  that  an  adverse  foreign 
exchange  acts  primarily  on  the  central  reserve,  which  is  our  most 
sensitive  Credit  meter— and  (2.)  that  the  desired  “ free  issues ” 
would  merely  strengthen  the  influences  which  baffle  the  corrective 
action  of  economic  law,  and  would  pro  tanto  exaggerate  the  evils 
of  a crisis  already  inevitable. 

It  is  true  that  at  three  successive  decennial  periods,  the  worst 
features  of  Panic  have  been  mitigated  by  a permission  to  issue  bank 
notes  which  had  no  claim  to  be  considered  as  transferable  gold 
warrants.  It  must  be  remembered,  however,  that  when  Panic  has 
once  supervened,  the  nature  of  the  problem  is  entirely  changed. 
My  conclusions  have  been  founded  on  the  composite  action  of  the 
mental  law  of  growth  of  Credit  and  the  eccnomic  law  of  demand 
and  supply.  But  at  the  period  of  crisis  Credit  has  no  growth— it 
is  for  the  moment  suspended.  If  one  factor  has  ceased  to  exist, 
you  cannot  work  out  the  problem  with  the  other.  The  crisis  had 
really  commenced  when,  as  we  saw,  the  drawing  power  of  price 
upon  Capital  was  overborne  by  the  diseased  activity  of  Credit,  and 
when  the  stimulus  of  a further  addition  to  it  would  merely  have 
aggravated  the  coming  disaster : but  in  this  latter  stage  a stage 
of  suspended  animation — a stimulus  is  the  very  thing  required. 
The  galvanism  applied  to  a paralysed  limb,  and  the  air  pumped 



into  the  lungs  of  a drowned  man,  arc  neither  of  them  vital  forces, 
acting  under  an  organic  law : hut  they  may  prove  excellent 
artificial  appliances  to  cases  of  exceptional  and  urgent  need. 

But  the  success  of  this  departure  from  sound  economic  principle, 
itself  testifies  to  the  value  of  that  principle  in  its  normal  working. 
A small  issue  of  notes  in  excess  of  the  gold  basis — nay,  the  very 
knowledge  of  their  becoming  accessible — acts  like  magic  upon  the 
chaos  of  general  doubt  and  confusion ; and  the  expressions  of 
wonder  which  always  greet  this  display  of  cosmical  energy  would 
be  in  no  degree  misplaced  if  the  energy  resided  in  a modicum  of 
paper  currency  as  such.  It  really  resides,  however,  in  the  mental 
association  which  Bank  of  England  notes  have  already  acquired 
with  the  absolute  security  derived  from  their  ordinai’y  basis  of  gold. 
The  known  common  condition  of  their  issue  constitutes  them 
Capital ; and  the  mental  effects  they  produce  as  Capital  are 
fortunately  continued  even  in  the  momentar}-  interval  when  they 
cease  to  be  such.  Could  any  more  striking  proof  be  given  that  a 
currency  which  is  Capital  is  the  most  natural  basis  for  Credit  in 
ordinary  times  ? 

I am  now  perhaps  fairly  open  to  the  query,  “Is  there  no  remedy 
for  Commercial  Panics  ? Is  it  a fatal  necessity  that  Credit  must 
grow  rank  and  rotten,  and  collapse  in  a spasm  of  terror  ? Must 
we  at  the  end  of  every  ten  years  resign  ourselves  to  a ruinous 
convulsion,  as  to  some  mysterious  decree  of  Providence  ?”  I can 
only  answer  that,  though  not  looking  forward  to  any  trade 
millenium,  blest  with  entire  immunity  from  disaster,  it  may  be 
fairly  hoped  that  the  cycles  of  Credit  can  be  indefinitely  lengthened, 
and  the  evils  which  mark  their  close  greatly  mitigated.  The 
philosophy  of  this  matter  recognises  as  little  of  Fate  as  it  does  of 
Chance.  But  the  first  step  must  be  to  remove  the  question  from 
the  realm  of  mystery  to  that  of  knowledge.  "We  can  grapple  with 
what  we  know.  And  as  we  have  found  moral  causes  lying  at  the 
root  of  these  changes,  it  is  to  moral  means  in  the  main  that  we 
must  look  for  controlling  them.  My  prescription,  therefore,  is  but 


the  old-fashioned  one  of  Education, — the  special  Education  of  our 
trading  classes  in  those  scientific  truths,  bearing  on  the  creation 
and  distribution  of  wealth,  the  ultimate  lesson  of  which  is  embodied 
in  many  a shrewd  old  aphorism  which  wc  are  equally  apt  to  quote 
in  words  and-to  neglect  in  practice.'  The  commercial  department 
of  education  is  at  present  mainly  a matter  of  “the  three  B’s,” 
with  an  addendum  of  Book-keeping.  I fear  our  middle-class 
schools  do  not  much  concern  themselves  with  the  principles  which 
underlie  the  phenomena  of  Exchange,  of  Credit,  and  of  Capital, 
nor  with  that  appeal  to  moral  sanctions  in  connection  with  these, 
which  should  strengthen  the  mind  against  a blind  energy  of  tem- 
perament and  a hasty  instinct  of  gain.  Educate,  indeed,  as  we 
may.  Credit  will  always  fulfil  its  own  law  of  growth  ; and  as  you 
cannot  endow  all  men  with  caution  and  conscience,  the  growth  will 
still  tend,  at  intervals  to  degenerate  into  a critical  rankness ; but  it 
is  very  sure  that,  to  the  extent  in  which  you  increase  the  average 
intelligence,  and  elevate  the  average  moral  tone,  you  co-operate 
with  the  conservative  action  of  economic  law  on  the  equilibrium  of 
Credit  and  Capital.  It  is  the  liability  to  an  ignorant  speculative 
excitement,  and  a willingness  to  take  immoral  risks,  which  ulti- 
mately put  the  growth  of  Credit  beyond  the  control  of  the  price  of 
loan  Capital.  Diminish  those,  and  the  cycle  may  then  expand 
beyond  its  customary  decade. 

To  some,  who  have  been  accustomed  to  denounce  the  sinistef 
action  of  a class  of  freebooters  and  wreckers  in  the  financial  world 
as  the  true  cause  of  Panics,  the  idea  of  forces  essentially  inde- 
pendent of  such  action,  and  following  a course  normal  of  develope- 
ment.  Will  be  specially  unwelcome.  But,  while  I should  be  sorry 
in  any  degree  to  weaken  the  sentiment  of  just  indignation  which 
is  being  every  where  expressed  against  conduct  that  has  blackened 
the  commercial  annals  of  the  last  few  years,  I venture  to  think 
there  would  be  small  gain  in  deliberately  ignoring,  on  that  account^ 
any  evidence  we  can  obtain  as  to  influences  that  are  actii  e on  the 
great  scale  in  preparing  a suitable  field  for  the  exercise  of  such  un- 

scrupulous  cunning  and  rapacity.  For  it  must  not  be  forgotten  that 
the  tendencies  whose  order  of  progression  has  been  sketched, 
operate  upon  the  broad  aggi’egatc  of  the  commercial  and  investing 
community, — not  upon  the  exceptional  Macheaths  and  Turpins  who 
infest  its  ranks,  and  whose  predatory  instincts  know  no  orderly 
succession  of  phases,  but  are  unchangeably  vicious  and  vigilant. 
A parallel  reflection  applies  to  the  suggested  remedy.  Ameliorate 
the  general  mental  conditions  of  commerce,  and  you  proportionately 
limit  the  sphere  and  powers  of  designing  knaves.  In  any  case, 
commercial  ethics,  which  are  clear  and  immutable,  dealing  only 
with  conduct,  can  put  no  bar  to  the  scientific  process  which  seeks 
only  the  explanation  of  facts. 

To  others  it  may  appear  a fanatical  doctrine  that  the  schoolmaster, 
rather  than  the  legislator,  is  the  magician  who  is  to  steady  our 
rates  of  discount,  and  save  Lombard  street  from  its  decennial  fits  of 
ten-or.  But  why  is  this  to  be  thought  more  fanatical  than  the 
proposal  to  relegate  our  working  classes  to  the  same  agency,  when 
they  fall  into  mischievous  economical  heresies,  or  when  their 
standard  of  workmanship  drops  below  that  of  their  continental 
brethren  ? 

So  far  as  these  northern  districts  are  concerned,  the  Cobden  chair 
of  Political  Economy  at  Owens  College,  at  present  so  ably  filled, 
might  become  a centre  from  which  should  radiate  the  remedial 
influences  which  I ventui'o  to  suggest.  In  matters  of  monetaiy 
science  I believe  Manchester  to  be  sounder  than  most  other  Com- 
mercial communities;  and  that  very  fact  imposes  upon  her  the 
obligation  to  employ  her  great  resources  in  diffusing  the  special 
kind  of  culture  required  to  diminish  the  disasters  we  are  met  to 

3>  o ^ 2i 

MR.  JOHN  Mins,